McGEE v. DRESNICK

The opinion of the court was delivered by: RONALD GUZMAN, District Judge

MEMORANDUM OPINION AND ORDER

Michael D. McGee ("McGee") has sued Stephen J. Dresnick
("Dresnick") for breach of fiduciary duty, breach of contract,
promissory estoppel, fraudulent misrepresentation and unjust
enrichment. The case is before the Court on defendant's motion to
dismiss pursuant to Federal Rule of Civil Procedure ("Rule")
12(b)(7) for failure to join an indispensable party.*fn1 For
the reasons provided in this Memorandum Opinion and Order, the
motion is granted in part and denied in part.

McGee, an Illinois resident, and Dresnick, a Florida resident,
are the principals and co-founders of PhyAm Acquisition Company,
LLC, an Illinois limited liability corporation ("the LLC") that
they formed to acquire the assets of PhyAmerica Physicians Group,
Inc. ("PhyAmerica"). (Am. Compl. ¶¶ 1-4.) On November 8, 2002,
PhyAmerica filed for bankruptcy, and McGee and Dresnick soon
after agreed to pursue PhyAmerica's assets as equal partners with
each partner absorbing half of the expenses they incurred in
doing so. (Id. ¶¶ 13, 16, 61.)

In July 2003, McGee and Dresnick jointly retained the Chicago
law firm of Freeborn & Peters to assist in their business
venture. (Id. ¶¶ 22-23.) On August 4, 2003, McGee and Dresnick
formed the LLC. (Id. ¶ 24.) Throughout the summer and fall of
2003, McGee and Dresnick worked with financial advisers to create
a plan of reorganization for PhyAmerica and to obtain financing
for their bid for the company. (Id. ¶¶ 26-30, 32-36, 37-41,
46-48.)

At some point during that time, unbeknownst to McGee, Dresnick
decided that he would bid for PhyAmerica on his own. McGee was
unaware of Dresnick's plan until September 9, 2003, when a lawyer
appeared solely on Dresnick's behalf at a PhyAmerica bankruptcy
hearing. (Id. ¶ 51.)

On October 1, 2003, Dresnick informed Freeborn & Peters that he
had terminated his relationship with McGee. (Id. ¶ 69.) On
October 16, 2003, without McGee's consent, Dresnick caused Articles of Dissolution to be filed with the Illinois
Secretary of State to dissolve the LLC. (Id. ¶¶ 72-74.)

By early November 2003, Dresnick and another partner formed the
company RD PhyAm to submit a bid for PhyAmerica's assets. (Id.
¶ 80.) On December 17, 2003, the bankruptcy court issued a
confirmation order authorizing the sale of PhyAmerica to RD
PhyAm. (Id. ¶ 85.)

On May 12, 2004, Dresnick gave a presentation at a healthcare
conference in New York in which he plagiarized materials McGee
had created for their partnership. (Id. ¶ 91.)

On October 15, 2004, McGee filed a complaint against Dresnick
on his own behalf and on behalf of the LLC. (See Def.'s Mem.
Law Supp. Mot. Dismiss, Ex. A, Compl.) Dresnick moved to dismiss
the complaint for lack of subject matter jurisdiction because the
LLC and Dresnick are both citizens of Florida. In response to
that motion, McGee filed an amended complaint, which does not
name the LLC as a party. Dresnick contends that the LLC, whose
joinder will destroy diversity, is an indispensable party to this
suit. Thus, he says the case must be dismissed.

Discussion

In the amended complaint, McGee asserts five claims against
Dresnick: breach of fiduciary duty, breach of contract,
promissory estoppel, fraudulent misrepresentation and unjust
enrichment. Dresnick argues that these claims really belong to
the LLC, which must be joined as a party. McGee claims he is
suing only on his own behalf for injuries he personally suffered,
and that the LLC need not be joined. We will address each claim
in turn.

In Count I of the amended complaint, McGee asserts a claim for
breach of fiduciary duty. Members of an LLC owe fiduciary duties
not only to the company, but to their fellow members as well. See 805 ILL. COMP. STAT. 180/15-3. Moreover, members
may sue other members who breach those duties "for legal or
equitable relief, with or without an accounting as to the
company's business." 805 ILL. COMP. STAT. 180/15-20(a). But an
LLC member can sue on his own behalf only if he has a personal
injury that is distinct from the injury to the corporation. LID
Assocs. v. Dolan, 756 N.E.2d 866, 885 n. 12 (Ill.App.Ct.
2001). If the member can prevail "only by showing an injury or
breach of duty to the corporation," the claim will be deemed
derivative. Frank v. Hadesman & Frank, Inc., 83 F.3d 158, 160
(7th Cir. 1996) (citation omitted).

McGee alleges that Dresnick breached his fiduciary duties when
he: (1) usurped the PhyAmerica deal (Am. Compl. ¶¶ 2, 16-17, 25,
42, 45, 51, 58, 62-66, 79-81, 93); (2) unilaterally dissolved the
LLC (id. ¶¶ 74-77); and (3) used McGee's business materials
without his permission (id. ¶¶ 90-91, 94). The first two
actions did not cause McGee to suffer an injury distinct from
that suffered by the LLC. Rather, his injury from both actions 
loss of the opportunity to acquire PhyAmerica  is identical to
that of the LLC. Because there would be no basis for these breach
of fiduciary duty claims if there were no injury to the LLC, the
claims are derivative. LID Assocs., 756 N.E.2d at 885 n. 12;
see Elmhurst Consulting, LLC v. Gibson, 219 F.R.D. 125, 127
(N.D. Ill. 2003) (holding that a breach of fiduciary duty claim
based on usurpation of corporate opportunity was derivative).

That is not true, however, for the fiduciary duty claim based
on Dresnick's alleged appropriation of McGee's business
materials. McGee need not show any injury to the LLC to prevail
on his claim that Dresnick used his materials without permission.
As a result, that claim is not derivative. In Count II, McGee alleges that Dresnick breached the parties'
oral contract to pursue the PhyAmerica deal jointly. (Am. Compl.
¶ 97.) McGee says that Dresnick breached the contract by: (1)
usurping the deal (id. ¶ 99); (2) refusing to reimburse McGee
for half of the expenses incurred in their pursuit of PhyAmerica
(id.); and (3) wrongfully dissolving the LLC (id.). Once
again, the claims based on usurpation and dissolution, which
cannot exist absent injury to the LLC, are derivative. LID
Assocs., 756 N.E.2d at 885 n. 12. The claim based on
reimbursement, however, is not dependent on injury to the LLC.
Because McGee could have sued Dresnick to recover the expenses he
incurred during their joint pursuit of PhyAmerica, even if they
had closed the deal, that breach of contract claim is not
derivative.

In Count III, McGee asserts a claim of promissory estoppel.
McGee contends that the parties' contract should be enforced
because: (1) Dresnick unambiguously promised McGee that the two
would pursue PhyAmerica as partners (Am. Compl. ¶ 102); (2) McGee
reasonably relied on that promise (id. ¶¶ 103-04); and, as a
result, (3) McGee suffered economically because he lost the
benefits of the PhyAmerica acquisition and incurred expenses on
behalf of the LLC (id. ¶ 105). For the reasons discussed above,
a promissory estoppel claim based on McGee's loss of the deal is
derivative, but a claim based on the expenses he incurred is not.

In Count IV, McGee asserts a fraudulent misrepresentation claim
against Dresnick. McGee alleges that Dresnick's false promises to
acquire PhyAmerica in partnership with McGee caused McGee "to
suffer pecuniary losses as Dresnick acquired the assets if
PhyAmerica to the exclusion of [McGee]." (Id. ¶ 111.) Because
this claim is based solely on Dresnick's alleged usurpation of
the LLC's corporate opportunity, it is derivative. LID Assocs.,
756 N.E.2d at 885 n. 12. In the last count of the amended complaint, McGee asserts a
claim for unjust enrichment. McGee alleges that Dresnick unjustly
profited by using McGee's business models and marketing materials
to acquire PhyAmerica. (Am. Compl. ¶ 114.) McGee seeks the
imposition of a constructive trust "upon any opportunity or
benefit realized by Dresnick through his improper acquisition of
PhyAmerica." (Id. ¶ 116.) To the extent McGee seeks
compensation for Dresnick's use of McGee's work, the unjust
enrichment claim is not derivative. If, however, McGee seeks to
recover the proceeds of the PhyAmerica acquisition, it is
derivative.

In sum, McGee asserts both derivative and individual claims.
The derivative claims are: (1) the breach of fiduciary duty and
breach of contract claims based on Dresnick's alleged usurpation
of the PhyAmerica deal and his alleged dissolution of the LLC;
(2) the promissory estoppel claim and unjust enrichment claims
based on Dresnick's alleged usurpation of the deal; and (3) the
fraudulent misrepresentation claim. The individual claims are:
(1) the breach of fiduciary duty and unjust enrichment claims
based on Dresnick's allegedly unauthorized use of McGee's
business materials; and (2) the breach of contract and promissory
estoppel claims based on Dresnick's alleged failure to reimburse
McGee for half of the expenses incurred by the LLC.

The next question is whether the LLC is a necessary and
indispensable party to any of McGee's claims. Under Rule 19, a
party is necessary if:

(1) in the person's absence complete relief cannot be
accorded among those already parties, or (2) the
person claims an interest relating to the subject of
the action and is so situated that the disposition of
the action in the person's absence may (i) as a
practical matter impair or impede the person's
ability to protect that interest or (ii) leave any of
the persons already parties subject to a substantial
risk of incurring double, multiple, or otherwise
inconsistent obligations by reason of the claimed
interest. FED. R. Civ. P. 19(a). Moreover, a necessary party is
indispensable if the following factors suggest that
the action should not proceed without it: (1) the
extent to which a "judgment rendered in the person's
absence might be prejudicial to the person or those
already parties"; (2) "the extent to which, by
protective provisions in the judgment, by the shaping
of relief, or other measures, the prejudice can be
lessened or avoided"; (3) "whether a judgment
rendered in the person's absence will be adequate;"
and (4) "whether the plaintiff will have an adequate
remedy if the action is dismissed for nonjoinder."
FED. R. CIV. P. 19(b).

The Supreme Court has held that a corporation is a necessary
party to a derivative action. Ross v. Bernhard, 396 U.S. 531,
538 (1970). That is certainly true here, as the LLC is the real
party in interest in McGee's claims for wrongful dissolution and
usurpation of corporate opportunity. Moreover, if the LLC is not
joined, it could file an independent suit against Dresnick,
leaving him subject to a substantial risk of incurring double or
inconsistent obligations. Consequently, the LLC is a necessary
party to the derivative claims.

The LLC is also indispensable. As a citizen of both Florida and
Illinois, see Cosgrove v. Bartolotta, 150 F.3d 729, 731 (7th
Cir. 1998) (stating that "the citizenship of an LLC for purposes
of the diversity jurisdiction is the citizenship of its
members"), the LLC cannot be joined to this suit without
destroying diversity. Yet, if this case proceeds in its absence,
Dresnick may be subject to a subsequent lawsuit on the same
claims, prejudice that cannot be eliminated or lessened by
protective provisions in the judgment. McGee, on the other hand,
will suffer no prejudice if the derivative claims are dismissed
for nonjoinder because he can pursue them in state court.

McGee argues that the LLC in this case cannot be an
indispensable party because, having been dissolved by Dresnick,
it no longer exists. There are two problems with this argument. First, though McGee alleges that the LLC was dissolved, he also
alleges that the dissolution was improper. (Am. Compl. ¶¶ 72-76.)
Thus, it is not clear from the amended complaint whether the
attempted dissolution was effective. Second, even if it was,
dissolution does not preclude the LLC from being a party to a
lawsuit. According to Illinois law, an LLC exists as a going
concern after dissolution "for the purpose of winding up its
affairs." 805 ILL. COMP. STAT. 180/35-3(a). In the course of
winding up its affairs, a dissolved LLC may, among other things,
"prosecute and defend actions and proceedings." 805 ILL. COMP.
STAT. 180/35-4(c). That is exactly what the LLC, through the
derivative claims filed by McGee, has done. Thus, McGee's
allegation that the LLC is dissolved does not shield it from the
reach of Rule 19.

In short, the LLC, whose joinder would destroy diversity, is a
necessary party to the derivative claims. Moreover, after
considering the Rule 19(b) factors, the Court concludes that the
LLC is also an indispensable party and cannot "in equity and good
conscience" permit those claims to proceed without it. FED. R.
CIV. P. 19(b); see Bagdon v. Bridgestone/Firestone, Inc.,
916 F.2d 379, 382 (7th Cir. 1990) ("If this is a derivative suit, the
corporation is an indispensable party."). Thus, the derivative
claims must be dismissed.

The situation is different for the individual claims. Those
claims are based on Dresnick's allegedly unauthorized use of
McGee's business materials and his alleged failure to reimburse
McGee for half of the expenses incurred in the parties' pursuit
of PhyAmerica. The LLC has no interest in these claims; they are
personal to McGee. As a result, joinder of the LLC is not
necessary to accord McGee complete relief and its absence does
not subject Dresnick to the risk of inconsistent obligations. The
LLC is, therefore, neither a necessary or an indispensable party
to these claims. Conclusion

For the reasons set forth above, defendant's motion to dismiss
[doc. no. 11] is granted in part and denied in part. The breach
of fiduciary duty and breach of contract claims based on
Dresnick's alleged usurpation of the PhyAmerica deal and his
alleged dissolution of the LLC alleged in Counts I and II, the
promissory estoppel and unjust enrichment claims based on
Dresnick's alleged usurpation of the deal alleged in Counts III
and V, and the fraudulent misrepresentation claim asserted in
Count IV are dismissed without prejudice. In all other respects,
the motion is denied.

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